When you refinance a car, you replace your current loan with a new one, usually at a different interest rate and term length
Refinancing means you take out a fresh loan to pay off what you still owe on your car. The new lender pays off your old loan in full, and you start making payments to the new lender instead. The main reason people refinance is to lower their interest rate — which reduces how much you pay each month and over the life of the loan — but you might also refinance to change how long you have to pay (your loan term) or to move from a co-signer to a loan in your name alone.
The process itself is straightforward: you explore with a new lender, they check your credit and income, they send money directly to your old lender to close that loan, and you get new loan documents and a new payment schedule. Your car title and registration don't change — you still own the same vehicle. What changes is who you owe money to and what your monthly payment looks like.
Key Takeaways
- Your monthly payment usually drops when you refinance at a lower interest rate, but it can rise if you extend your loan term or rates have gone up since you first borrowed.
- Refinancing involves a credit check and a hard inquiry, which temporarily lowers your credit score by a few points, but the impact fades within weeks.
- You will need to provide proof of income, insurance, and the vehicle's current value to the new lender before they approve the refinance.
- If you still owe more than the car is worth (being "underwater"), refinancing is harder but sometimes possible through specialized lenders.
- The best time to refinance is when interest rates drop, when your credit score has improved since you took out the original loan, or when you want to shorten your loan term.
How your monthly payment and total cost change
When you refinance at a lower interest rate, your monthly payment drops because less of each payment goes toward interest and more goes toward paying down what you owe. For example, if you have three years left on a $15,000 loan at 8% interest, your payment might be around $460 per month. If you refinance that same $15,000 at 5% interest for the same three years, your payment drops to roughly $440 per month — and you pay less total interest over time.
However, your payment can go up if you extend your loan term (say, from three years to five years) even at a lower rate, because you are spreading the payments over more months. It can also go up if interest rates have risen since you first borrowed, or if your credit score has dropped. The total amount you pay over the life of the loan depends on three things: how much you still owe, the interest rate, and how many months you have to pay it back.
Before you refinance, ask the new lender for a loan estimate that shows your new monthly payment, the total interest you will pay, and the payoff date. Compare that to what you are paying now. Some lenders offer online calculators where you can plug in numbers and see the difference.
What happens to your credit score
When you explore to refinance, the lender runs a hard inquiry on your credit report — a formal check that shows up on your credit history. This inquiry typically lowers your credit score by a few points, usually between 5 and 10 points. The impact is temporary: the inquiry stays on your report for about a year, but its effect on your score fades within a few weeks as long as you keep making on-time payments.
If you explore with multiple lenders within a short window (say, two weeks), the credit bureaus count those inquiries as a single inquiry for scoring purposes, so you do not get penalized multiple times. This is called "rate shopping," and it is a normal part of refinancing.
The good news is that refinancing can actually improve your credit score over time. If the new loan has a lower monthly payment, you are less likely to miss a payment. If you are refinancing to remove a co-signer, that can also help your score because you are taking on the full responsibility yourself. And as you make on-time payments on the new loan, your payment history — which is the biggest factor in your credit score — stays strong.
Documents and information you will need to provide
The new lender will ask for proof of income (usually recent pay stubs or tax returns), your driver's license or state ID, and proof of insurance on the vehicle. They will also want to know the current value of your car, which they may look up using the vehicle identification number (VIN) or ask you to provide an estimate from a site like Kelley Blue Book or NADA Guides.
You will need your current loan documents or account number so the new lender can contact your old lender and find out exactly how much you still owe. Some lenders can pull this information themselves; others ask you to provide it. Have your car's title and registration handy — the lender may ask to see them, though they typically do not need to hold them.
The entire process usually takes three to seven business days from process to funding, though some online lenders are faster. During this time, keep making your regular payment to your old lender unless the new lender tells you to stop.
When refinancing makes sense and when it does not
Refinancing makes the most sense when interest rates have dropped since you took out your original loan, or when your credit score has improved enough that you now may have access to for a better rate. It also makes sense if you want to shorten your loan term and can afford a higher monthly payment — paying off the car faster means less total interest.
Refinancing usually does not make sense if you are close to paying off your loan. If you have only six months left, the savings from a lower rate may not be worth the time and cost of refinancing. It also does not make sense if interest rates have risen or if your credit score has dropped significantly, because you might end up with a higher rate than you have now.
Be cautious about refinancing to lower your payment by extending your loan term. Yes, your monthly payment drops, but you end up paying more total interest and staying in debt longer. If your budget is tight, that might be necessary — but it is worth doing the math first to see the true cost.
What happens if you owe more than the car is worth
If you are underwater on your loan — meaning you owe more than the car's current market value — refinancing is harder but not impossible. Most traditional lenders will not refinance an underwater loan because if you stop paying, they cannot recover their money by selling the car. However, some credit unions and specialized lenders will refinance underwater loans, especially if your credit score is good and you have a steady income.
If you do find a lender willing to refinance, you may face a higher interest rate than someone with positive equity in their car, because the lender is taking on more risk. Some lenders will also require you to make a down payment to bring the loan amount closer to the car's value.
Before you pursue an underwater refinance, check your car's value using Kelley Blue Book, NADA Guides, or Edmunds, and calculate exactly how much you are underwater. Then contact credit unions or online lenders that advertise refinancing for underwater loans and ask what rates and terms they offer.
What does not change when you refinance
Your car itself does not change — you keep driving the same vehicle, and the title stays in your name. Your insurance does not change unless you choose to change it. Your warranty does not change. The only things that change are who you owe money to, what your monthly payment is, and how long you have to pay.
If you have a loan through a dealership's financing arm (like Ford Credit or GM Financial), refinancing with a bank or credit union does not affect any warranty or service agreement you have. If you have a gap insurance policy (which covers the difference between what you owe and what the car is worth if it is totaled), check with your old lender about whether that policy transfers to the new loan or whether you need to purchase a new one.
Frequently Asked Questions
Can I refinance a car I am still paying off?
Yes. You can refinance at any point while you still owe money on the car, as long as you have positive equity or find a lender willing to work with underwater loans. The new lender pays off your old loan, and you start fresh with a new one.
Does refinancing hurt my credit?
Refinancing causes a small, temporary dip in your credit score because of the hard inquiry. The impact usually fades within a few weeks. Over time, refinancing can help your score if the new payment is easier to make on time or if you are removing a co-signer.
What if my car has a loan from a buy-here-pay-here dealership?
These loans are harder to refinance because traditional lenders often will not work with them. Your best option is to contact credit unions or online lenders that specialize in refinancing difficult loans. Be prepared for a higher interest rate.
How long does refinancing take?
Most refinances take three to seven business days from process to funding. Some online lenders are faster. During this time, keep making payments to your old lender unless you are told otherwise.
Can I refinance if I have bad credit?
It is harder but possible. Credit unions often work with people who have lower credit scores, and some online lenders specialize in bad-credit refinancing. You may face a higher interest rate than someone with good credit, so compare offers from multiple lenders.